Small-Cap Value ETFs Leading in Trump Rally

VBR includes 30.8% financials and 21.1% industrials. IJS holds 18.8% financials and 18.5% industrials. IWN tracks 32.2% financials and 12.8% industrials.

The financial sector has been outperforming on hopes that President-elect Trump would remove tough regulations, notably restrictions implemented under Dodd-Frank, and on a rising interest rate environment.

Dodd-Frank has forced many banks to increase more conservative capital holdings to obviate another potential financial crisis event. While these more secure capital restrictions help limit exposure to risky or distressed assets, banks are finding it harder to make loans and do business. The regulations have also been particularly hard on smaller banks.

Meanwhile, a rising interest rate environment helps banks’ bottom line. With the Federal Reserve enacting a recent interest rate hike and looking to add three more next year, banks are able to make a larger profit off the spread between loans and deposits.

The industrial sector has also benefited from President-elect Trump’s promises to increase fiscal spending to expand America’s infrastructure. Moreover, Trump’s protectionist policies may also support domestic or smaller U.S. companies.

In contrast, the blended Russell 2000 Index includes a smaller tilt toward financials and industrials, along with a greater position in the lagging technology sector. The large-cap S&P 500 Index’s largest weight is also in the underperforming information technology sector.